FL TAX ALERT - CONVENIENCE STORE OWNERS TARGETED!!!!

Posted on Aug 16, 2012 By James Sutton and Jerry Donnini

CONVENIENCE STORE OWNERS ARE BEING ASSAULTED BY THE FLORIDA DEPARTMENT OF REVENUE. HERE IS THE REASON WHY… AND WHAT YOU CAN DO ABOUT IT

If you or someone you know owns a convenience store in Florida, then there is a good chance you have heard that an extremely high number of convenience store owners have been receiving disturbing notices from the Florida Department of Revenue ("FL DOR") starting around July of 2012. If you have heard this, then I can confirm for you that the rumors are true and that it is likely much broader of a concern than you realize. And, in case you were not aware, it only takes a very small amount of collected but unremitted sales tax to become a felony in Florida. [See link at bottom of this article about civil and criminal penalties in Florida sales and use tax law]. Effectively, the entire convenience store industry in Florida has a target on their back right now. Here is the reason why…

In 2011, without much fanfare, a new law went into effect in Florida requiring all wholesalers, manufacturers, and distributors of alcohol and tobacco to provide annual sales information the FL DOR for sales to retailers of alcohol or tobacco in the state of Florida. What was not generally reported to the public was the level of detail the wholesalers and distributors were required to disclose. Effectively, these wholesalers were required to disclose their sales by type of product, by month, by retailer. If you are a retailer of alcohol or tobacco, then this should start to set off an alarm in the back of your mind. Now, the FL DOR knows exactly how much and what type of alcohol and tobacco each retail location is buying in the state of Florida. The next alarm that should be going off is just how easy it is for the Department of Revenue to compare what a retailer reports in monthly alcohol or tobacco sales on their sales tax returns to the reports coming from the wholesalers. [See the link to an article on the new wholesaler's law at the bottom of this article.]

Since the start of July, our firm started seeing the aftermath of this new wholesale reporting law. Specifically, we have received a dozens of calls from companies that sell alcohol and tobacco products, particularly convenience stores. We have recently been told that each of Florida's over 500 auditors has been assigned at least 1 alcohol and tobacco sales related case and some have several audits assigned to them. Additionally, there are a high number of desk audits being issued from the Tallahassee Service Center. The majority of the taxpayers have been convenience stores. This article is meant to educate the convenience store owner (and their professional advisors) about the perils they face, how the FL DOR is comes up with their sales estimates, and how to handle the matter.

Various businesses are being contact by different methods, each with their own unique perils. Some people are receiving a Form DR-840 Notice to Audit Books and Records, effectively a notice that they are about to be audited for Florida sales and use tax. Others are receiving a Form
DR-846, Notice of Intent to Conduct a Limited Scope Audit or Self-Audit. Finally, and most disturbing of them all, a high number of convenience store owners are receiving a
Form DR-1216 – Notice of Intent to Make Audit Changes, without ever having been audited. No business owner is happy when they are contacted by a state tax agency, but this last type of notice, the DR-1216, feels like an outright accusation of wrong doing with a demand for more money that most small business owners could not possibly afford to pay. Imagine opening your mail to find that the Florida Department of Revenue, without ever looking at your records, is going to assess in excess of $100,000 plus penalties and interest. I have yet to see a DR-1216 for less than $100,000 of assessed tax, and I've seen several claiming more than $300,000 due. Let's start with a discussion of each of these FL DOR Notices.

FORM DR-840 – NOTICE OF INTENT TO AUDIT BOOKS AND RECORDS

The Form DR-840 - Notice of Intent to Audit Books and Records is the standard method of auditing a business. The auditor will examine all areas of potentially taxable purchases and sales to determine whether addition tax is due. While this is the most typical type of audit performed by the state of Florida, the majority of the convenience store audits are not being handled this way. So we will not go into much detail herein. However, please feel free to contact our offices to discuss this type of audit if you have more questions.

FORM DR-846 – NOTICE OF INTENT TO CONDUCT A LIMITED SCOPE AUDIT OR SELF-AUDIT

The Form DR-846, Notice of Intent to Conduct a Limited Scope Audit or Self-Audit is considered by the FL DOR a minor audit with a very limited focus of one type of transaction or one particular transaction. However, to a convenience store owner with a high volume of alcohol sales, this is anything but a minor issue. The notice itself proclaims to be an effort "to ensure compliance with the tax law of Florida and to educate taxpayers about the tax law," while asking the taxpayer to admit very specific facts about purchases and sales of alcohol. In reality, the FL DOR is attempting to get you to admit your taxable sales are higher that what you reported. Most taxpayers are unaware that the FL DOR already has purchase information from the company's alcohol and tobacco vendors, so providing false information on this form is not only futile, but is very likely evidence of fraud. So convenience store owners could unwittingly be lining themselves up for criminal charges, if they have not already done so. Ideally, it is in the taxpayer's best interest to get a Florida Tax Attorney experienced in Florida sales and use tax or other professional involved at this stage. If done correctly, the Taxpayer may be able to avoid the next stage of the process and get the issue resolved accurately and much more cheaply if done at this stage.

FORM DR-1216 – NOTICE OF INTENT TO MAKE AUDIT CHANGES

The Form DR-1216, a Notice of Intent to Make Audit Changes that can be found here. The FL DOR is simply taking the alcohol and tobacco purchases for the company during the prior year and multiplying them by an estimated "mark-up." The so-called "mark-up" is based on industry national averages, with a complete disregard for the local market practices. The FL DOR will then take the purchases data reported from the wholesalers and multiply it against the national average mark-up for that type of product (e.g. beer or wine), to come up with a complete guess of a taxpayer's alcohol and tobacco sales prices for each type of product. Next, the DOR, based on industry averages, calculates the amount of sales that each product represents compared to total sales for that industry. With this completely invented sales price and estimate of what percentage of total sales are each type of product in hand, the DOR assumes that it knows a taxpayer's alcohol and tobacco sales for the period. For example, we have found that the DOR approximates that somewhere around 49% of convenience store sales are for alcohol or tobacco products. Based on these estimates, the FL DOR approximates the sales per month for the company and applies that average over the audit period.

HOW TO HANDLE THESE CASES

There are a lot of serious flaws in the Florida Department of Revenue's logic in these cases. Each and every c-store has its own story, its own sales mix, and its own mark-up percentages. To simply accuse a store owner of underreporting based on national averages is crossing the line. We have even found instances where wholesalers have double reported sales figures to certain retailers, which leaves the retail business owner with an enormous assessment in complete error. These cases are challengeable to say the least. Another interesting tidbit of information is that most of the FL DOR's purchase information provided by the wholesalers only goes back one year. So, for each particular case, there are a lot of holes to punch in the both the FL DOR's logic and the estimated amounts.

Normally, our comrades at the FL DOR are more careful before making accusations like this. However, the FL DOR has received too many reports of substantial underreporting of sales tax receipts in the non-corporate owned convenience stores. So, in their minds, the FL DOR feels justified in being this aggressive. It is the honest (and not so honest) convenience store owner that now has to deal with the consequences.

We started hearing rumors as early as Spring 2012 that the criminal division was being brought on board for more than 400 cases with over $1,000,000 of allegedly under reported sales tax. It only takes $301 of underreported sales tax to become a 3rd degree felony in Florida and $20,001 to become a 2nd degree felony with a maximum sentence of up to 15 years in prison. If one crossed the $100,000 line of collected but unremitted Florida sales tax, then the one is looking at a 1st degree felony and up to 30 years in prison - if convicted. The FL DOR will quickly threaten a taxpayer with these statutory statistics if they really think a business owner has been skimming sales tax. The FL DOR also has other weapons up their sleeve to use against a business owner - such as a legal action to remove the business owners sales and use tax registration certificate. [See link at the end of this article to an article discussing this tactic].

It is a mistake to try and take on FL DOR in these cases without the help of a very experienced Florida sales tax attorney or other professional to guide your business through the process. The stakes are just too high. While there are some serious civil tax risks at stake, there is also the potential for criminal liability. Even if a taxpayer ends up owing some taxes at the end of the day, we can help you negotiate a payment plan or potentially compromise some of the taxes, if the circumstances warrant. Our lawyers, who also all have strong accounting backgrounds, are experienced in not only defending audits but also handle criminal defense in Florida sales and use tax matters. If you or a client of yours is has been contacted (or you fear being contacted) by the Florida Department of Revenue, then please call or email our offices today for a free initial (and confidential) consultation about your matter.

Please also take note, while your accountant is a trusted advisor, there is no protection of confidentiality in criminal proceedings between an accountant and client. Such confidentiality only occurs when speaking with a Florida licensed attorney or an accountant working under an attorney with a Kovell Letter. We work with accountants around the state to assist client in criminal matters and we can work with your accountant as well.

ABOUT THE AUTHOR: MR. SUTTON IS A FLORIDA LICENSED CPA AND ATTORNEY AND A SHAREHOLDER IN THE LAW FIRM the Law Offices of Moffa, Sutton, & Donnini, P.A. MR. SUTTON IS IN CHARGE OF THE TAMPA OFFICE FOR THE FIRM AND HIS PRIMARY PRACTICE IS FLORIDA TAX CONTROVERSY. MR. SUTTON WORKED FOR THE STATE AND LOCAL TAX DEPARTMENT OF A BIG FIVE ACCOUNTING FIRM FOR A NUMBER OF YEARS AND HAS BEEN AN ADJUNCT PROFESSOR OF LAW AT STETSON UNIVERSITY COLLEGE OF LAW SINCE 2002 TEACHING STATE AND LOCAL TAX, ACCOUNTING FOR LAWYERS, AND FEDERAL INCOME TAX I. YOU CAN READ MORE ABOUT MR. SUTTON IN HIS FIRM BIO.

About the author: Mr. Donnini is a Florida Attorney and an associate in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A., in Fort Lauderdale, Florida. Mr. Donnini's primary practice is Florida tax controversy with a heavy emphasis on the petroleum industry. Mr. Donnini worked as an accountant for a public REIT prior going to law school and is currently pursuing his LL.M. in Taxation at NYU.

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